Sunday, 27 July 2008

Let`s Enjoy the Olympics

 27th July 2008
The Malta Independent on Sunday

In the first article I published in this series last January, I had dwelt on whether this year, 2008, like 1968, could enter the history books as a landmark year for strategic shifts, in politics, in economics, in thinking and in the general approach to life.

Six months down the road, 2008 is living well up to these expectations. The changes going on around us are breathtaking and have an aura of strategic shifts and not mere tactical switches.

Historians could pin on 2008 the passage from a uni-polar to a multi polar world with at least three political centres of influence emerging and undergoing, individually and collectively, transformational change which will shape the evolution of world politics for decades to come.

Obama clinching the Democratic nomination for presidency was against all odds. In his pre-election European tour, he is showing all the hallmarks of a once in a lifetime character that moves the masses and inspires the crowds. If he becomes a world leader half as good as he speaks, then the world can expect true positive change from the western side of the Atlantic. His impromptu speech in Berlin was inspirational and convincing on the need for America to become more networked with its key allies and for Europe to assume a larger international role in places like Afghanistan where foreign troops are operating under a UN mandate. His Berlin speech reached the same calibre as the Ich bin Berliner speech of JFK and the ‘Mr Gorbachev tear down this wall’ speech of Ronald Reagan.

Winston Churchill is claimed (probably incorrectly) to have said that the Americans always get it right in the end after they exhaust all other options. Separating myth from reality with Churchill is a tricky business as his enormous appetite for success, war, technology, conversation, alcohol and cigars turned him into a legend. Hopefully, after the disaster of the Bush war presidency, that has weakened America’s power and influence in the world, the next President can regain for America the respect and position of leadership by recognising the limits of its military superiority so clearly exposed in the Iraq war, and through personality, persuasiveness and charisma, restore America’s credentials for multilateralism through supranational organisations like the UN and Nato.

There is no doubt that Obama has better credentials for performing this job than John McCain, who remains in favour of the Iraq war when in reality what is needed is structured disengagement from Iraq and focus of energy on Afghanistan from where the terrorist threat started and remains. And this must be done fast if America and its allies are to have the credibility necessary to deter Iran from pursuing its nuclear ambitions.

Europe continues to struggle with the dilemma of the limits for its growth by offering membership to countries that seek it. Having successfully integrated the former communist countries of Eastern Europe into the EU, it would be dangerous if it were to close its doors to new aspirant countries, which were formed after the disintegration of the former Yugoslavia, the former USSR and Turkey itself. The re-acquisition of economic power by the Russian State could very well fill the vacuum left if Europe shatters the membership dream of these countries.

World history shows that economic power will sooner or later morph into political power and Russia’s bullying of Georgia and Ukraine is but a mere symptom of the course history will take if Europe were to exclude countries like Turkey, Ukraine, Croatia, Serbia, Albania and Kosovo.

Yet, such vision of further expansion of the EU needs the support of existing members at granular democratic level not just at the level of its political representatives. The Irish No to the Lisbon Treaty has shown a country in the far west of the Union having scant appreciation of the collective need to continue the expansion to the East. On present rules of total unanimity resulting from the Nice Treaty, it is unlikely that the Lisbon Treaty can ever be ratified, inadequate as it already is as a platform for further expansion.

This brings back the argument whether the EU is being unrealistic in its quest for imposing uniform rules on all its members and whether, beyond certain basic standards related to the single market, it should allow a more flexible type of arrangement for opting in or out of other provisions. It seems that efforts in this direction have been given an impetus after the Irish Vote with an EU country sub-grouping making its own arrangements for mutual recognition of divorce standards and with the French taking an initiative for the Mediterranean Club, which in many ways aims to keep Med countries in the EU fold without offering them membership terms, which would add further stress to its rigid structures.

Yet, among all this uncertainty, Europe is emerging as a political and economic force that is now a serious challenge to America’s dominance in the half century after the Second World War. The strength of the euro and the weakness of the US dollar is a mere symptom of this shift as investors see more discipline and anti inflation credentials in the way the Europeans manage their economic affairs, rather than the way the Americans have of keeping their economy growing artificially by jumping from one economic bubble to the next.

Yet, I reserve the greater change to the emergence of China, with its laws of big numbers, as the third economic world power. It was announced this week that China has the largest number of Internet users in the world even though the level of Internet penetration is still very low. In spite of the quasi recession in the US and slowdown in Europe, China’s economy keeps growing in double digit terms and seems to have acquired its own internal dynamics that disengaged it from dependence on exports to the US.

Yet China remains an experiment still in the making. How realistic is it to sustain such economic growth through capitalist systems at micro level but keeping central command type of policies at macro level? If the Chinese authorities continue to filter the fruit of economic growth so that most of it remains under State control rather than be allowed to cascade down to the population to stimulate further consumption, they will be building up great imbalances in the world economy, which will eventually explode either through very sharp domestic inflation or through sudden revaluation of China’s currency.

This cannot be allowed to happen when the world’s eyes will be on the Beijing Olympics, but after that reality will have to be faced. Either way the political system in China will come under stress. Slowing down will become a necessity for maintaining the current political structures but this is easier said than done once certain internal dynamics have been unleashed. Yet without the central control of the Communist Party, China could fall into chaos as the sharp economic difference between the economic fortunes of urban and rural populations could become a great destabilising force. Democracy has never been tested successfully in countries as big and as diverse as China and, as in the case of Russia, democracy will push towards the breakdown of the country in various independent republics, which is not exactly what the world needs to become a stable place.

For now, let’s enjoy the Olympics.

Friday, 25 July 2008

The Good the Bad and the Ugly


25th July 2008

The Malta Independent - Friday Wisdom

I mean to tackle them in reverse order leaving the best for last. The ugly, very ugly, is the fishermen’s tragedy on a well equipped Maltese fishing boat which disappeared without giving any alert. One crew member miraculously survived one week at sea without water, food and shelter whilst another is still missing with vanishing hopes after three lifeless bodies were recovered.

There are so many questions and so few answers about what actually happened and why such incident could not be avoided in the first place and why the rescue operation proved so unsuccessful. What is needed is a thorough independent enquiry to establish the facts and to bring out the truth and all the truth. Until this is done it is unfair to start pointing fingers at individuals or organisations especially when organisations like the Armed Forces have an enviable track record in conducting successful rescues in much worse climatic conditions than the ones prevailing when this tragedy occurred and evolved.

The bad is learning that part of the deal which brokered compromise for liberalisation of the hearse service, and the eventual disintegration of the public transport strike which had started off as a sympathy strike in support of the hearse service providers’ resistance to liberalisation, involved payment by government of e230,000 to existing licence holders purportedly to facilitate the restructuring of the sector in order to withstand liberalisation.

To impartial, and may be uninformed observers out here, it looks more like a bribe to break down the reason why the strike started in the first place. It sets dangerous precedents for the liberalisation of more important segments of the transport sector. Is the taxpayer going to be involved in expensive handouts to gain the benefits of liberalisation? Have these monopolistic providers not been having it good for long enough? Do we have to pay them to give us back our jam jar?

As I argued in last week’s contribution, I very much doubt if liberalisation of the hearse service will work to benefit the consumer even if the number of providers were to double following liberalisation. Given the inelasticity of demand for the service, additional service providers will inevitably mean a sharp increase in under-utilisation of the invested capital which ultimately will be billed to the consumer as financial necessity will drive the operators into formal or informal cartel.

When liberalising a service which is so rigidly inelastic, the process has to be accompanied with price regulation in order to deter excessive and unproductive investment which ultimately will benefit no one, least of all the consumer.

The good, indeed excellent, is the news about another ‘de Bono’ who has made us proud to be Maltese by making a name for himself in the medical field of cancer research. Following the international fame claimed by Professor Edward de Bono of lateral thinking fame, yet another namesake, as far as known unrelated, secured international headlines about a cure still under research which in the initial clinical trials has given very promising results for the treatment of prostate cancer.

When there is a medical breakthrough in some research development it is best to judge its materiality by its effects on the financial markets. Ultimately research is a very expensive process and somebody somewhere would be paying for it hoping to reap financial returns in case of success, even to make up for many other research dollars spent on other projects which lead to nowhere.

The news that Dr Johann de Bono, a Maltese doctor reportedly assisted by another Maltese doctor Gerhardt Attard, headed a research team at Royal Marsden Hospital in London who are developing a new drug which is giving very consistent positive results for the treatment of prostate cancer, should make us all proud.

The best judge of the importance of this development is to consider the effects on the financial fortunes of those who would make financial gains if this research is concluded successfully leading to the licensing of the drug for general application. I quote a financial report I lifted on 22 July from Dow Jones Newswires


Shares in UK life sciences firm BTG PLC rose on Tuesday amid widespread publicity for experimental prostate cancer drug abiraterone, a BTG product licensed to Cougar Biotechnology of the US and hailed as a major advance in treating the disease by British researchers.

The results were described by charity cancer research UK’s cancer expert Professor Malcolm Mason as ‘extremely exciting’ although he said larger trials were needed.

Shares in BTG rose seven per cent whereas they gained 47 per cent in the last 12 months.

BTG licensed abiraterone from the Institute of Cancer research many years ago and subsequently it licensed it to Los Angeles based Cougar Biotechnology. Since then Cougar paid the institute two and a half years trials and pushed the drug through development and began pivotal phase III trials since April in more than 1000 patients. The trials will test the drug in metastatic castration-resistant prostate cancer in patients for whom chemotherapy has failed – one of the most aggressive and deadly part of the disease.

It’s an area of major unmet medical need, said BTG director of investor relations Andy Burrows. Analysts estimate that if successful, sales of abiraterone could reach sales between $500 million and $1 billion a year.


I assure you they don’t come much better than this even from the big spenders in medical research of pharma and biotech companies.

For doubters like me about the wisdom of financing education of specialists who seek their fortunes overseas this comes as a timely reminder that it would be a sin against humanity if we were to compress the abilities of our professionals to the limitations of our structures which can hardly be developed to handle such mega research projects.

What we should aspire for from such positive developments is to establish the credentials of our basic tertiary education in order to entice international biotech companies to set up research laboratories in our midst to tap into the high calibre of medical cadre our university produces. Hopefully the pharma generic manufacturers amongst can upgrade their skills for research of own products as the big generic TEVA is doing in Israel.

In the meantime those human resources that seek fortunes elsewhere are not necessarily a brain drain. They eventually return with more experience and knowledge we can ever give them here.

Friday, 18 July 2008

The Wrong End of Liberisation

 18th July 2008
The Malta Independent - Friday Wisdom

Liberalisation of the hearse service market has let loose what seems an over and disproportionate reaction by other transport service operators including public buses, white taxes and minivans who then forced other operators like the unscheduled bus/coach service to down tools for fear of loss of blood and treasure.

Let’s get two points clear. I am all for orderly liberalisation of the markets where genuine competition may exist that would bring better value for the consumer. Monopolies should be dismantled wherever possible and where the size or nature of the market does not allow for dismantling of monopolies then these should be strictly regulated.

Secondly, while everyone has a right to strike to defend their interest, we should not tolerate anybody who thinks that the rule of law can be freely swapped with impunity for bullying, wild threats and irrational behaviour that affects innocent consumers making alternative arrangements, like using their own private means of transport, to mitigate the inconvenience of the strike.

There is however something odd, almost funny, in all this. In its search for a long overdue solution to remove public transport monopolies, the government seems to have chosen the hearse service as a test case. This service does not lend itself well to liberalisation and frankly I don’t think that liberalisation is in the interest of the consumer, certainly not anywhere near the same scale of the benefits that would result from liberalisation of much more obvious and crucial public transport services.

Liberalisation is suited for services which have strong sensitivity to price movements. In technical economic terms this is referred to as elasticity of demand, meaning that services with high elasticity of demand have a strong correlation to the price. The lower the price, the higher the demand.

The most obvious example of this is mobile telephony service. When introduced under monopolistic arrangements the service had very restricted clientele who could see value in paying a high price for the facility to be contactable on the move. As the technology moved and the market was liberalised, prices for usage of mobile telephony started to tumble, opening the markets for basically everybody else and inventing many more ancillary products that could be used on what remains essentially a voice telephony service. Liberalisation of mobile telephony benefited everyone because the service had a high elasticity of demand.

Compare this to the hearse service. Would more people opt to die purely because the funeral service gets cheaper? Clearly it is a very inelastic service. No one would opt to die twice even if the service is free. On the other hand, the service would be used whatever it costs when needed once the inevitable happens. If there is a service which is absolutely inelastic to its price, the hearse service is it.

Furthermore even if there were a free market it is very doubtful if this would work in favour of the consumers. Indeed it could very well work against them. Hearse service is required at a very sensitive time when relatives suffering the loss of their loved one would be in no position to shop around for the most competitive offering. Their frame of mind at the time when funeral arrangements decisions have to be made on the spot without much time to think and when they are emotionally upset, renders hearse service users price takers if not from the hearse service providers directly then from the undertaker who puts all funeral arrangements together.

Formation of cartels is inevitable even if the number of service providers were to double. And if this were to happen, it would mean that double the investment would have to be made which remains locked and unused in garages for much longer meaning that the cartel will ultimately jack up the prices of the hearse service to cover the increased inefficiencies of having many more vehicles being used for much fewer days.

In the circumstances, consumers of hearse services would benefit much more from regulation than from liberalisation. Whenever consumers are placed in a situation of distress needing a service for which the circumstances do not allow the proper workings of the free market, then the consumer has to be protected. Hearse services should be priced regulated not price liberalised. Competition would then be on the basis of quality although obviously operators would be free to compete on price if they wish but within the regulated price cap.

Take taxi service in an international free market economy where there is true competition between different modes of transport. Still, when I walk out of a foreign airport, I cannot be expected to negotiate my fare trip with the individual taxi driver. I have to pick the taxi which stands next in line. So because I have no real opportunity to use the levers of the free market to protect me as a consumer of the taxi service, I rely on regulation which is evident to me through the working of the taxi meter inside the cab. Many times it is not the quantum of how much I am being asked to pay that matters, but the knowledge that I am being asked to pay the right price as approved by the regulators of the land I am visiting. Consumers hate paying high prices but they hate much more the feeling of being cheated through market abuse.

The over-reaction by the general community of public transport services providers is therefore indicative that what is being objected to is not merely the liberalisation of the hearse services, which frankly is neither here nor there, but the establishment of models that could be transported to other more important segments of the public transport industry.

For the general public the outcome of the hearse service issue per se is not really important. What is much more important is getting competitively priced and efficient transport service which we use throughout our life not just at the end of it. The government should be careful not to win victories which do not matter at the expense of remaining blocked on issues that can really bring about positive change to our daily lives. Public transport reform is one such issue

Sunday, 13 July 2008

The Curse of the Reserve Currency

13th July 2008
The Malta Independent on Sunday

There’s something strange going on in the financial world for which there is as yet no definite explanation. The world had grown accustomed to living smoothly with structural imbalances without great problems but suddenly something snapped and these imbalances no longer seem sustainable.

The USA, as the holder of the reserve currency of the world, has been running huge balance of payments deficits, which were being reflected in huge surpluses in oil-exporting countries and in China, Japan, India and other Asian economies. Notwithstanding the huge magnitude of such imbalances they did, for a time, seem to defy the laws of natural economics and appeared sustainable indefinitely without difficulty, as surplus countries accumulated reserve dollars which they gladly re-lent back to the US at cheap rates.

This worked well for the US consumers who could so afford to live beyond their means through easy credit on terms that indicated repayment could only come by taking a larger loan to re-finance. Larger debt was not considered scary, as the availability of cheap credit brought an asset price bubble in real estate making the net finances of consumers appear stronger, higher debt notwithstanding, for as long as the value of their immoveable, mostly residences, kept increasing.

It also worked well for the surplus countries as it permitted them to peg their own currencies to the US dollar in order to protect their price competitiveness by not allowing their own currency to revalue in accordance with the efficiency gains and development of their own economy.

Reality can be avoided for a long time but not forever. Something had to give and it finally snapped on both sides of pacific, and also in Europe, with unpleasant consequences.

On the US side, the property bubble burst with very severe consequences on the US consumers, who are witnessing the value of their property fall below the level of covering mortgages, leading to loan defaults, foreclosure and a glut of unsold property stock that is continuing to depress property prices, sometimes to exaggerated levels. The pendulum never stops in the middle when it is released from far out. This is causing the banks to register huge losses on their property exposure, weakening bank balance sheets, demanding massive recapitalisations and causing severe illiquidity on the financial markets, where even the most deserving are finding it difficult to access credit.

On the Asia side, the fall in the value of the US dollar and the corresponding fall in their own pegged currencies is causing accelerating domestic inflation, overheating their economies with an increased risk of economic collapse and huge foreign exchange losses on their foreign reserves if the rate of exchange of their domestic currency has to be allowed to revalue to mitigate the serious problem of inflation.

On the European side, countries who had experienced a property boom caused by their recent economic successes, such as the UK, Ireland and Spain, are now being hit by the burst property bubble and illiquid financial markets imported from the US. Euro area countries are suffering from an overvalued currency that had to absorb the fall in the value of the US dollar, which should have been absorbed by the surplus Asian currencies that however remain artificially pegged to the US dollar.

Every country is suffering under the severe strain of exploding energy prices and exploding food prices, which was contributed to partly by the mistaken policy of trying to solve the energy crisis by shifting to bio-fuel production the resources normally allocated to food production.

We are now in the painful phase of re-balancing structural imbalances which suddenly became unsustainable. The US economy is slowing, flirting with outright recession at a time when consumers are being hit right, left and centre. Their asset values are falling, their purchasing power is being hit by the doubling of energy prices and they are suffering withdrawal symptoms from credit dependence as credit is no longer available. This slowdown will reduce consumer demand, which will address the balance of payment deficit through rising unemployment and business defaults. Asia will also have to slow down its pace of growth if it is to address its domestic inflation problem. Higher domestic interest will make the currencies of Japan, China, Korea, Taiwan and other Asian tigers unable to sustain their peg to the US$. In the absence of a drastic decision to allow their currencies to float freely, monetary authorities will have at least to tolerate greater flexibility in their peg to the US$. A contemporaneous slowdown in the US and Asia will go a long way to address structural imbalances but only at the expense of a rather prolonged, even if shallow, recession. Such curtailment of demand would then reduce the rise in the price of energy and commodities and sometime in 2009 we could possibly look forward to growth based on a more sustainable base.

There are many theories as to why we have come to this point and why it has happened so suddenly, when until this time last year the world seemed perfectly comfortable with long-standing structural imbalances. My explanation to this is what I term the curse of the reserve currency.

The moment a currency is accepted as an international reserve currency there is born within it the seeds of its own destruction. The owner of the reserve currency, as the US has been since the end of the Nazi war, has the facility to acquire its needs from the rest of the world merely by creating more of the freely acceptable currency. In reality, it becomes an obligation to service world growth by creating more of the reserve currency entailing the reserve currency-owning country to start running chronic balance of payments deficits. In simple layman’s language, this means that the owner of the reserve currency will be duped to start living well beyond its means.

Too much of a good thing gradually starts creating its own problems, as reserve currency holders start getting restless with the large accumulation of reserves and growing doubt about the sustainability of its value. Six years ago the US$ was worth €1.290. Now it is worth €0.58. Its value has more than halved in Euro terms. Could the increase in the price of energy and commodities be explained, at least in part, by the policy of mass holders of US$ to convert them into real assets as quickly as possible by buying energy and commodities both spot and futures before the dollar falls further?

We are possibly at the sunset stage of the US$ as a reserve currency after suffering the curse reserved for such status. What will take its place remains to be seen.

Friday, 11 July 2008


11th July 2008
The Malta Independent - Friday Wisdom

Surcharge Subsidy
Many expressed doubts about whether the 30,000 households who are being exempted from the surcharge on their utility bills truly merit such subsidy or whether such list of social cases is effectively populated by households who in effect earn more than they declare and consequently are not only evading tax but getting a double whammy receiving undeserved subsidies on surcharges which are killing the rest of us.

If there is a reliable measure of what households truly earn it is their energy consumption pattern. It is not a perfect measure but still very indicative and in the absence of other evidence there is no doubt that high consumption is indicative of high earnings. So while gladly showing solidarity with genuine social cases who live too close to the breadline to afford paying the surcharge, it is only fair that opportunity is taken to weed out the blood suckers by checking that the subsidised energy consumption truly reflects the pattern of a deserving household.

Labour’s Extended Shadow Cabinet
The decision to include nearly each and every Labour MP in the shadow cabinet means that Joseph Muscat is treading carefully trying to solidify his position before proceeding to tough decisions – which however are inevitable if he is to make Labour electable.

This may be a wise move not to ruffle too many feathers before taking full grip of the party he now leads. But it is no long-term solution if the new leader really means to leave his positive mark on the party.

At some point in the not too distant future he has to start choosing his real shadow cabinet. Uncommitted voters need to identify themselves with faces that will form the executive of a designate Labour government.

Secretary General Selection Menu
The PN councillors were given a very restricted menu to choose their new secretary general from. Presumably in the PN’s case it does not really matter much who the secretary general is as behind him there is a brain bank which shapes the party strategy. MLP is different. The secretary general is basically the CEO with very thin resources behind him both to set the strategy as well as to help in the execution. Labour have much greater need than the PN for a resourceful person in role of secretary general.

When an incumbent is contested it sends a signal that not all is well with his performance. When an incumbent is vibrantly contested the way Jason Micallef seems likely (some five or six other claimants seem to be lining up for the post) then it is not a signal. It is writing on every wall that he failed and he should go.

Strengthening Democracy
Dr Joseph Muscat played his cards well when he told the Prime Minister that the pairing agreement can only be considered if it is included in a much wider package which strengthens democracy and addresses issues that have hurt Labour and abetted the PN in securing their extended stay in power.

The need to bring some discipline to party financing is supreme. Without it we will never have an effective democracy. I wrote extensively on this and still think that only total abolishment of political donations will work. Whatever threshold is established for donations still leaves an escape window to structure donations within such threshold.

Controls on what caretaker governments can do in the run up to elections is also another area where discipline is needed as in a two-horse race a few hundred votes make the difference between government and opposition.

However Labour would be more credible if its own statute is overhauled in parallel to ensure that the power of incumbency does not effectively weigh on who is elected to high party positions. The leadership election of 2003 and 2008 were both influenced by the power of incumbency. It should not be.

The Board of Discipline and Vigilance needs to be re-invented and renamed with its main task being the takeover of the party administration in the period between a general election and the general conference electing the leadership and the administration. The election commission should be answerable only to the board. During the rest of the time the board should be issuing codes of conduct and ethics for all in the party and making checks to ensure that such ethics are being adhered to. It should be a positive board armed with the authority of moral suasion rather the threat of discipline. Discipline will be reserved for the executive of the party only after the board would have exhausted all efforts to make moral suasion work.

Fair Value Destruction
The fair value accounting standard is forcing banks to make provisions on asset valuations which are by all measures fundamentally wrong and in the current circumstances severely undervalued. This is compounding problems and creating more uncertainty in the financial markets than needs be.

Fair value accounting is built on the principle that the market price is reflective of correct asset pricing. This notion has long been abandoned in the investment world where markets are known to overshoot in both directions so that market values tend to depart widely from the underlying fundamental values sometimes to the upside (irrational exuberance as in 1999/2000) and sometimes to the downside (irrational pessimism as at present).

It is time to review the fair value accounting principles. Banks that can show ability to hold on to assets till maturity should not be obliged to write fictitious losses leading to more pessimism and yet more fictitious losses. In such cases the concept need to change to long-term fair value rather than current market price.
Cheaper to Die

Liberalisation of the hearse service should make it cheaper to die. How about more liberalisation that makes it cheaper to live.

Friday, 4 July 2008

Spoilt for Choice

04th July 2008
The Malta Independent - Friday Wisdom

This week I was spoilt for choice of the wrong type. I had too many topics to write about and this is quite unusual in summer when one is often forced to search through subjects left on the shelf from the colder months.

France taking over of the EU presidency and Sarkozy’s diplomatic skills, or lack of them, in devising a solution out of the Irish stalemate for adoption of the Lisbon treaty and in handling the clash of policies with the European Central Bank headed by another Frenchman, deserves a column on its own.

So does the raving debate in local blogs about whether continuous complaints about lack of quality service at the emergency department of Mater Dei Hospital and the lengthening waiting list for non urgent surgery, result from undue expectations about what universally free medical service can actually deliver or whether we are seriously experiencing the law of diminishing returns where the more we put in the less we get out.

The White Paper about an overdue reform for property under rental arrangements dating prior to 1995 is obviously a very topical subject. At this stage I would just say that as a consultative document it makes a noble effort to unblock a situation which has been jammed for decades and which clearly lost much of its original social purpose. While tweaking and refining will be necessary to address some questionable measures proposed in the White Paper, there is no doubt that its general orientation is positive and laudable.

However, none of these topics can overcome the supremacy and immediacy of the government’s decision to practically double the surcharge on utility bills as well as to increase the retail price of fuel at the pump by about 10 per cent. As a result the final utility bill will essentially increase by 30 per cent ({100% + 95%}-{100%+50%}) that is three times the increase imposed upon prices of fuel at the pump.

Before entering into the merits of such spread of the burden of higher energy prices, let me make clear that no one should be under any illusion that there is any realistic way that the consumer can be shielded from the shattering effects of exploding energy prices. Direct across the board subsidies are both unaffordable as well as economically inappropriate.

Unless energy price increases are permitted to filter down to the consumer (both intermediate and final) we will never achieve the much-needed adjustment in demand for energy products. This demand has to adjust to take account that energy is expensive and that the international terms of trade have worsened, apparently in a structural manner, against energy consumers and in favour of energy exporters. The only feasible response for such an unsavoury reality is by becoming energy efficient and such efficiency cannot be delivered except through price mechanisms. We simply need to adjust our living habits to drive smaller cars, use public transport, economise on heating and air-conditioning, and keep lower stocks in the house to be able to switch off the second freezer.

On a longer-term basis we do of course need to invest in renewable energy sources, and this both at country and individual level, but this cannot deliver the needed immediacy of results if we change exaggerated habits like using air-conditioning to freeze the room rather than to acclimatise it.

Some made the argument that government will be benefiting from increased tax revenue by virtue of the ad valorem duties and VAT applicable on fatter energy prices and government should use the extra revenue to cushion the energy price increases.

Government seems to have adopted this suggestion when it declared that the surcharge without government intervention would have been 115 per cent rather than 95 per cent and the difference is being footed by government by increasing subsidies to Enemalta.

The concept of across the board subsidies gives me a headache. The very idea that the State should subsidise to any degree excessive users who can afford swimming pools, air-conditioning in every room, and lighting as if there is no tomorrow is an insult to my social conscience. It would be more appropriate to consider limiting the subsidised surcharge to a cap reflecting “normal” consumption per capita and apply full surcharge without any subsidy to excessive consumption.

The government should also consider channelling part of the extra income it nets from ad valorem taxes and VAT, as well as savings that can be made by economising on street lighting (switching off every alternate lamp is not so drastic in these acute times) by subsidising public transport to make it more appealing to commuters. It will help consumers to contain the impact of high energy costs, reduce importation of high cost energy products, ease traffic leading to more efficiency, and make a significant contribution to a better environment.

Which brings me to the question as to why prices of fuel at the pump were raised only one-third the prices of utilities. This could be partly explained by the fact that utility prices were not adjusted for some eight months during which period fuel prices underwent some relatively minor tweaking upwards. However the main reason is otherwise. The main reason is that for the way we measure inflation the changes in fuel prices have greater impact on the retail price index than changes in utility prices. And given that we still have mechanisms which transfers measured inflation into automatic wage increases, the government is extra careful to avoid agreeing pricing structures which stimulate measured inflation with the risk of igniting second round inflationary spiral.

Valid as this is in the current circumstances nothing changes the fact that this is like the tail wagging the dog. Real inflation probably goes up just as much, or even more, by utility price increases as by fuel price increases. If anything, utility usage is somewhat less sensitive to price changes than usage of fuel purchased at the pump. The reality is that we are carrying outdated legacy systems for quasi automatic wage increases triggered by measured inflation which are totally inappropriate for an economy struggling to preserve its competitiveness following its membership in a hard monetary union with a currency that by all economic measures is fundamentally overvalued.